UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 15474 / September 4, 1997
Accounting and Auditing Enforcement
Release No. 951 / September 4, 1997
Securities and Exchange Commission v. Wyatt Gene Ross, Lynn K. Ross, and
Mickie E. Higgins-Hallke
(N.D. Ga., Civil Action No. 1-97-CV-2431-JEC)
The Securities and Exchange Commission announced today that it has
charged two Atlanta, Georgia residents and a Denver, Colorado man with
fraud. The three defendants are W. Gene Ross of Highlands Ranch, Colorado,
his brother Lynn Ross of Marietta, Georgia, and Mickie Higgins-Hallke of
Smyrna, Georgia. All three are former officers of Paragon Mortgage
Corporation, a now defunct mortgage banking company formerly headquartered
in Smyrna, Georgia. Gene Ross was Paragon's chief executive officer and
chairman of its board, Lynn Ross was a director of Paragon and its
president, and Higgins-Hallke was Paragon's chief financial officer.
The complaint alleges that the Ross brothers misappropriated
approximately $230,000 from Paragon over a five-year period by causing
Paragon to repay personal loans with corporate funds, and by personally
intercepting checks remitted to Paragon and endorsing them for their
personal benefit. The Ross brothers concealed this theft from Paragon's
shareholders and also misled Paragon's independent auditors concerning
their theft.
The complaint also alleges that from 1990 through 1994 the defendants
overstated Paragon's income in various annual and quarterly financial
statements filed with the Commission. In some instances, Paragon reported
net income when it should have reported net losses and in other reports,
Paragon understated its net losses by over 200% and overstated its income
by 225%.
In June 1990, Paragon's board of directors granted stock options to
purchase 530,000 shares of Paragon's common stock, worth $258,750, to the
Ross brothers and four other Paragon employees. The Commission alleges
that Gene Ross failed to report this transaction in Paragon's June 30, 1990
quarterly and September 30, 1990 annual financial statements. The
Commission also alleges that Gene Ross altered Paragon's September 30, 1990
annual financial statements by deleting $200,000 of compensation expense
which had been recorded in Paragon's books and certified by Paragon's
independent auditor.
The Commission's complaint also charges that Gene Ross and Higgins-
Hallke inflated the income reported in Paragon's September 30, 1992 annual
financial statements by improperly reporting $814,949 of gains from the
sale of certain loans. Additionally, Higgins-Hallke failed to report
$24,961 of medical claims incurred during 1992 related to Paragon's self-
insured employee medical plan.
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The Commission also charges that Gene Ross illegally sold Paragon
common stock, and illegally tipped three members of his family to sell
their Paragon common stock, before the Ross brothers' misconduct was
publicly disclosed. The complaint alleges that in December 1993, Gene Ross
told his wife to conduct a meeting at their house with Gene Ross' two adult
sons and his wife's brother. At the meeting, Gene Ross' wife, on her
husband's instructions, tipped these three family members, who were
employees of Paragon and whom Gene Ross knew held Paragon stock.
Subsequent to this meeting, Gene Ross' sons and brother-in-law sold Paragon
stock.
Gene Ross and Lynn Ross (the "Ross brothers") and Higgins-Hallke have
each consented to a permanent injunction, without admitting or denying the
allegations set forth in the complaint, which enjoins them from violating
the antifraud, reporting, books and records, and internal accounting
control provisions of the federal securities laws. The Ross brothers have
also consented to be permanently enjoined from violating the proxy
provisions of the federal securities laws. Gene Ross has agreed to pay a
total of $65,000 of disgorgement of insider stock trading losses illegally
avoided by him and his family plus pay prejudgment interest thereon, and
civil penalties. Lynn Ross has agreed to pay civil penalties in the amount
of $25,000. Higgins-Hallke will not be required to pay civil penalties
based upon her inability to pay such penalties. In addition, all three
defendants have agreed to be barred from acting as officers or directors of
public companies.
Previously, the Commission instituted administrative proceedings in
which five CPAs, who served as Paragon's independent auditors at various
times from 1990 through 1993, were charged with having engaged in improper
professional conduct during their work for Paragon. Those auditors settled
the proceedings without admitting or denying the charges against them. (In
re Langford et al., Securities Exchange Act Release No. 38249; In re Couch,
Securities Exchange Act Release No. 38250).
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